European Commission report on the monitoring of Patent Settlement Agreements

In the European Commission’s pharmaceutical sector enquiry report of July 2009, the Commission drew attention to patent settlement agreements between originator and generic companies, indicating that these can raise competition law issues in particular where there is a value transfer from the originator, patent owning company to the generic company in return for delayed market entry or limits on market entry on the part of the generic company.Since the time of the pharmaceutical sector report, the Commission has opened proceedings apparently relating to patent settlement agreements, concerning Les Laboratoires Servier.

The Commission has published its first annual report on the monitoring of patent settlement agreements on 5 July 2010, covering the period mid 2008 to the end of 2009.The data resulting from this period are compared with the period 2000-2007 which was assessed in the pharmaceutical sector inquiry.Overall, the Commission has found a significant decrease in the 2008-2009 period compared with the previous period, in the proportion of settlement agreements involving a value transfer from the originator to the generic company and which might attract competition law scrutiny.The change, in percentage terms, is from 22% of settlements reported during 2000 and 2007 to 10% of the settlements during the 18 months period of mid 2008 to the end of 2009 (nine agreements out of the total of 93 assessed).Moreover, the direct value transfers (cash payments) involved have decreased significantly from EUR 200 million in the period covered by the sector inquiry to EUR 1 million in the period covered by the most recent monitoring exercise.The Commission attributes the reductions to increased awareness of the competition law concerns resulting from the publicity shown in the pharmaceutical sector inquiry report and also the proceedings launched against Les Laboratoires Servier, due to the deterrent effect.

The Commission’s report confirms that the category of settlements most likely to attract competition law scrutiny, are those involving a value transfer from the originator company to the generic company.The value transfer could take different forms, not necessarily in monetary transfer.It could also include “side deals” such as the appointment of the generic company as a distributor or the grant of permission or a waiver for the generic company to remain on the market in another geographical area or by allowing unopposed market entry with another product marketed by the originator company.Alternatively the value transfer could consist in the grant of a licence to the generic company enabling market entry.Given the wide range of the different types of transfers, both direct and indirect, it is not surprising that the Commission stated not all agreements falling in this category would be incompatible with the EU competition law, and that this needed to be assessed on a case by case basis.

The Commission’s report also assesses settlement agreements which limit generic entry without a value transfer, as potentially raising competition law issues.Such agreements typically involve the generic product being allowed on to the market but subject to limitations contained in a licence agreement granted by the originator company.As a general principle, such a settlement agreements need not be considered to raise competition law concerns, though they may do so in certain situations.These situations include the following.First, competition law concerns may arise where the settlement agreement imposes obligations or limitations outside the territorial scope of the relevant patent.Second, concerns may arise where the patent holder knows that its patent has resulted from the provision of incorrect, misleading or incomplete information to the patent authorities.This reflects the first of the two abuses of dominance recently upheld by the European General Court in the AstraZeneca case (reported elsewhere in this Bulletin), which concerned the wrongful application for (and in some cases grant of) supplementary protection certificates based on misleading information concerning the date of the first relevant marketing authorisation.

The Commission’s report provides little if any new analysis beyond what was contained in the pharmaceutical sector inquiry report regarding the competition law status of patent settlement agreements, including those involving a value transfer (whether monetary or indirect) to the generic company.The number of such agreements that the Commission has been able to assess is perhaps too few to allow for any more insightful categorisation by the Commission of the types of agreement and relevant issues involved.Moreover the Commission states in its report that it has merely investigated whether a value transfer was agreed upon without verifying the net amount of the transfer, nor any possible justifications for it.Thus the report is of limited value in providing any guidance or implication of Commission thinking regarding the principles of Article 101 TFEU in relation to patent settlement agreements.

However, it is interesting to note the apparent significant decline in the proportion of patent settlement agreements involving a value transfer, and especially the significant decline in the monetary value of value transfers as between the period covered by the pharmaceutical sector inquiry report and the 18 months period covered by the Commission’s monitoring report.This said, the Commission states that it will continue to monitor patent settlement agreements for a further year in order to see whether any action is needed, whether under competition law or otherwise.